04-24-2014: July Cotton: Strong Demand in Face of Production Problems in India

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calendar Spread

Level Table
Other Factors

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India appears to be the key to higher cotton prices. Its reliance upon genetically modified cotrton seeds or "hybirds" has led to unanticipated consequences of attacksd from disease and poor yields. Crop density has been a factor with the newer breeds of cotton. Careful testing and selection of newer cotton types was abandoned to some degree allowing more than a hundred varieties of less-tested cotton to greatly impact the country's cotton output. India in the past was a large seller of cotton to China, which until recently was working down extensive internal inventories. China now appears to be "back in the market" but is buying from elsewhere other than India. Higher quality U.S. cotton has found new markets in this competitive world as exports exceed anticipations from the USDA, the world Cotton Council, and other trade organizations.

As always, however, and affecting everything in commodities, our lame-brained President threatens a trade war with China where U .S. cotton is almost certain to be targeted with high tariffs and reduced demand from China, one of the world's largest consumers of cotton. This remains a wild card in a highly manipulated commodities market under this awful president. Disrupting world markets and the environment is his specialty, but it seems to work better for U.S. equities than most U.S. commodities.

Intermarket Analysis

We fed Kansas wheat, Chicago wheat, and soybeans into a neural network to get the following result:

Parabolic Chart

July Cotton:

Parabolic Chart

Nirvana Chart

July Cotton:

Initial Chart

News Analysis

Very strong weekly export figures have supported cotton prices. Some believe the market is now close to pricing in strong demand. To provide continued support, the USDA will need to increase exports and lower exports in the May 10th supply/demand update. Weekly export sales recently were at 290,299 bales for the current marketing year and 229,800 bales for the next marketing year for a total of 520,000 bales. Cumulative cotton sales stand at 110% of the USDA forecast for 2017/2018 versus a 5-year average of 94.8%. A significant adjustment in USDA projected exports is in order. Offsetting the outlook for tighter old crop ending stocks is the significant jump in planting area expected for the new season. While U.S. planting are expected to jump, traders see a significant jump in soybean plantings in India in areas which were hit with boll worm issues for cotton last year.

India is the only country that exclusively grows cotton hybrids. Over-reliance on this technology may have invited problems such as infestation by the boll worm and low yields. At first, the high cost of hybrid seeds prevented farmers from adopting them in a big way until 2002. That year, Bt cotton changed the economics of cotton production by cutting down on the costs of insectisides for boll worms. India got careless in the number of hybrids it approved. A three-year trial/testing period was abandoned. Poor-quality hybrids got approved by the hundreds. Hybrids were also tall and bushy unlike previous tall and straight varieties. That meant they could not be planted in large densities, reducing high yields that were seen in other places like Brazil and Australia. Also the mass of seeds and lint was low compared to the mass of shoots and leaves in hybrids. Fertlizers pumped into hybrids were diverted to leaves rather than lint. White fly infestations alsoi became a problem with Bt cotton.

Less rain in the Texas Plains than that expected helped lift new crop prices. Premium widened on U.S. cotton in the Far East. Certified contracts of old crop cotton declined 5.106 bales. Cotton futures soared to contract highs in botgh old and new crop delivery months.

Personal health problems and lake pollution are being reported as a result of Adidas and Nike use of polyester in their products. Researchers at universities have prompted some governments to require polyester garments to carry a health warning label.

There were no farm bill amendments in a recent House Committee vote that would affect government cotton producer subidies or insurance.

The USDA estimates that 1 million or more fewer acres in the U.S. will be devoted to crops of all sorts out of 319 million planted last year. Farmers are expected to plant 13.5 million acres of cotton in 2018.

An International Cotton Advisory Committee (ICAC) forecast said cotton prices will hit five-year highs in 2018-19. Its forecast for inventories was the lowest since 2011-12. It sees an average of 84 cents per pound. It is looking foir 83 cents this season. China has focused on reducing imports and drawing down on its bloated inventories of cotton. Even so, there has been a surge in exportrs from India to China. China is approaching a transition point where it needs to import significantly more cotton. It has drawn down its reserve stocks in recent years. If China goes elsewhere for cotton, there would be corresponding tightness in other exporters allowing the U.S. to unload some of its exortable surplus. Northern Plains farmers in the U.S. are considering recucing cotton acerage due to low soil moisture conditions there. Non-irrigated cotton fields in Australia are having a problem with yields.

Higher tariffs would harm U.S. cotton trade with China. China so far is the U.S.' second largest export market at 2.5 million bales purchased. The National Cotton Council obviously strongly opposes tariffs. With them, exports to China could decrease 25%. U.S. sales to Vietnam and South Asia have increased to offset decreased sales to China.

A recent study by Cotton Inc. found that 7 in 10 consumers refer their sheets and bedding toi be cotton-rich. Two thirds indicated they were likely to purchase sheets and bedding made in the USA with U.S. cotton.

ICE Futures is reverting to a 3 cent per day price move limit on cotton futures above or below the previous settlement price.

Point & Figure Chart

 88.0I                                                                  R  4/20
     I ICE - Jul-18 Cotton #2, 50000 lbs, c/lb.    Cm.=0.06  Lim.= 3.3
     I                             X X
     I                             XOXOX
     I                         X   XOXOX
     I                         XO  XOXOX
     I                         XO  XOXOX
     I                         XO  XOX
     I                         XO  XO
     I                         XO  X
     I                     X   XO  X
     IO                    XO  XOXOX
     IO                    XO  XOXOX
     IO                    XO  XOXOX
     IO                    XOX XOXOX
     IO                    XOXOXOXOX
     IO                    XOXOXOXO
     IO                    XOXO O
     IO          X         XO
     IOXO    XOXOXOX     X X
     I    OXOX      O O OX
     I    OXOX          OX
     I    O O           OX
     I                  O
         111         111       1   1
Our computer tells us a non-conventional reactive approach works best for cotton on p&f charts. Therefore the above chart is taken as giving a sell signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical low and a seasonal down period.

Cyclicals Cyclicals Seasonals

Internal Program

Our best-performing internal program is "Pattern". It is giving a weak sell signal.

Internal Printout 1 Internal Printout 2

Results of "Pattern" for Cotton (blue lines = successful trades, red, unsuccessful): (Always in the market.)


Third System Confirmation

Our third system has triggered a buy signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


The point value is $500. Initial margin on a single contract is $2,200. Use of options is advised.

Historic Range

If we discount the huge blip in 2011, scale traders are not a factor in this price range.

Historical Chart

Commitment of Traders

Commitment 1

In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-long.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that the current uptrend remains intact from the last volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Our option trade recommendation is to Buy (1) Cotton December 81 Put and Sell (1) Cotton October 84 Put @ 0.23 to the buyi side or less.

o 1 o 2 o 5

Calendar Spread

What the Jul. - Dec. calendar spread suggests to us is that buying the near contract and selling the far one is at most times profitable, which we think is a sign that these futures may go up in the long run. The best time to enter or leave the above spread is when it is at 2.50 or narrower selling the far as prices are falling and then buying the near, and exiting or entering when it is at 5.50 or wider buying the far as prices are rising and then selling the near. At this time, we appear to be headed toward the buyi the far, sell the near point.

Level Table:

Level Table

The path of least resistance is up.

 88.0|                                                                  R  4/20
 ICE - Jul-18 Cotton #2, 50000 lbs, c/lb.    Cm.=0.06  Lim.= 3.3
     |TWWXX[   <<<
 63.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.113
                               1 1 1 1 1 1                            
       4 5 5 6 6 6 7 7 8 8 9 9 0 0 1 1 2 2 1 1 2 2 3 3 4 4           4
       2 0 1 0 1 3 1 3 1 2 1 2 1 2 0 2 0 2 0 2 0 2 0 2 0 1           2
       1 4 8 2 6 0 7 1 4 8 2 6 0 4 7 1 6 0 5 2 5 1 7 1 5 9           0

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day (4/20).

Intraday Chart

                 Risk Versus Opportunity Report

                     CTN8    July Cotton

                      High Price:  91.65
                   Current Price:  84.73
                       Low Price:  81.34

                            Risk:  0.078
                     Opportunity:  0.160

                    (O/R) Ratio =  2.041

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis - 1
Parabolic Chart + 1
Nirvana Chart + 1
News + 1
Point & Figure - 1
Cyclicals - 1
Seasonals - 1
Internal System 1 - 1
Internal System 2 0
Third System + 1
Historic Range 0
Commitment of Traders + 1
Range/Volatility + 1
Level Table + 1
Other Factors + 1
Total + 3
Place 6 July Cotton on a Buy Watch with stoploss @ -2 .57 below the get-in point when recent price is represented as "84.73".